How to calculate insurance premiums

If you have an insurance policy, you might be wondering how companies calculate your insurance premiums. You pay insurance premiums for policies that cover your health, as well as your car, house, life, and other valuables. The amount you pay is based on your age, the type of coverage you want, the amount of coverage you need, your personal information, your zip code, and other factors.

Key points to remember

  • An insurance premium is the amount of money you pay for an insurance policy.
  • You pay insurance premiums for policies that cover your health, car, home, life, and more.
  • Insurance premiums vary based on your age, type of coverage, amount of coverage, insurance history, and other factors.
  • Premiums can increase each time you renew an insurance policy.

What is an insurance premium?

When you have an insurance policy, the company charges you money in exchange for that coverage. This cost is known as the insurance premium. Depending on the insurance policy, you can pay the premium monthly or on a semi-annual basis. In some cases, you may need to pay the full amount up front, before coverage begins.

Most insurance companies offer a variety of ways to pay your bill, including online options, automatic payments, credit and debit cards, checks, money orders, cashier’s checks, and bank drafts. . You can get a discount if you sign up for paperless billing options or pay the full amount all at once instead of making minimum payments.

How much does an insurance premium cost?

There is no fixed cost for insurance premiums. You could have the same car as your neighbor and end up paying more (or less) for insurance, even with the exact same coverage. It is worth shopping around and comparing prices and policies.

You will pay more for “better” coverage. For example, a health insurance policy with a $ 1,000 deductible will be more expensive than a policy with a $ 5,000 deductible. Likewise, an auto insurance policy with a $ 0 deductible will be more expensive than a policy with a $ 500 deductible, all other factors being the same.

Still, that doesn’t mean you should automatically go for the cheapest policy just to save money. It is essential that you take your circumstances and the likelihood that you will need to use this policy into account when choosing the plan that is best for you.

How to calculate insurance premiums

Insurance companies take several factors into account when calculating insurance premiums:

  • Your age. Insurance companies look at your age as this can predict the likelihood that you will need to use the insurance. With health insurance, young people are less likely to need medical attention, so their premiums are generally cheaper. Premiums increase as people get older and are more likely to need more medical services. And teenage drivers are still working to expand their experience, so they’re more expensive to insure. Likewise, older drivers, who tend to have slower reflexes, will also pay more.
  • The type of cover. In general, there are several options available to you when purchasing an insurance policy. The more comprehensive the coverage, the more expensive it will be. For example, if you have an auto insurance policy that covers liability only, it will be cheaper than if you have a plan with collision, comprehensive, liability, medical, and uninsured / underinsured motorist coverage.
  • The amount of coverage. The less coverage, the cheaper the premiums, no matter what you insure. If you buy health insurance, for example, you will pay lower premiums for the same type of coverage if you have a higher deductible and a higher maximum cost. Likewise, it will cost more to insure a $ 400,000 house than a $ 200,000 house.
  • Personal informations. Depending on the type of insurance you are looking for, the insurance company may take a close look at things like your claim history, driving record, credit history, gender, marital status, method of life, family medical history, health, smoking status, hobbies. , work and where you live.
  • Actuarial tables. Most actuaries employed by insurance companies, who are professionals, assess the risk of financial loss using mathematics and statistics to predict the likelihood of an insurance claim, based on a large part of the above criteria. They usually produce what is called an actuarial table which is provided to the underwriting department of an insurance company, which uses the input to set policy premiums.


The percentage of auto insurance companies that take credit scores into account when calculating insurance premiums.

How to reduce your premiums

Insurance companies are all about assessing risk. The higher the risk, the higher the premiums. Still, there are ways to lower your premiums.

One way is to “bundle” your insurance. For example, if you have your auto, home, and life insurance policies with one company, you will likely qualify for a discount.

Of course, you can save money if you reduce your coverage (eg increase your deductible); However, this is not always a good choice. Consider your circumstances and the likelihood that you will be using the policy before making any decisions.

There are other ways to save on your premiums as well, but they require more commitment. For example, most states charge smokers up to 50% more than non-smokers for health insurance policies. For example, if you are a smoker and you pay $ 600 per month for health insurance, you may be able to reduce your premium to, say, $ 400 if you quit smoking.

Another example: You may be eligible for lower auto insurance rates if you improve your credit score. This is because people with a lower credit score are, statistically speaking, more likely to file a claim.

The bottom line

Whether or not you’re consolidating your insurance, quitting smoking, or improving your credit score, it’s always worth shopping around. This way, you can find the best insurance policy at an affordable price.

About Ellen Lewandowski

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